The changes may have been cosmetic and won’t rock the boat of insurance companies
The Insurance Regulatory and Development Authority (IRDA) introduced sweeping changes in Unit-linked Insurance Plans (ULIPs) yesterday. Among the measures are-a five year lock-in, even-out commission over the first five years and graded charges for the subsequent years.
How will these changes affect ULIPs? Are they competitive now with mutual funds (MFs) as long-term products? Nothing has really changed for the investors.
All IRDA has insisted is that the fat commissions, which insurance companies were paying, would have to be spread over five years. Insurance companies were doling out upfront commission as high as 30%-35% to distributors in the first year.
They will now have to spread this commission over the five-year lock-in period. But this will put off distributors used to making a fat upfront income. "It's not attractive for distributors anymore," said a top official from a fund house. He points out that for mutual fund investors, there is no entry load. If you invest Rs1,000, you will get units equivalent to Rs1,000. Considering a commission of 6% in ULIPs for the first year, if you invest Rs1,000 in a ULIP, your investment will be worth Rs940 after deducting the 6% expenses.
The insurance regulator has attempted to cap the charges at 4% annually for 5 years, and 3% for 5-10 years and 2.25% for products of above 10 year terms.
These are more expensive than mutual funds. The total maximum permissible expense for a mutual fund stands at 2.5% on the first Rs100 crore of the average weekly net assets collected by the fund. This is then reduced to 2.25% for the next Rs300 crore, 2% on the subsequent Rs300 crore corpus, which finally comes down to 1.75% for the balance assets. The expenses consist of Investment Management & Advisory fee (1.25%); Custodial fees (0.05%); Registrar & Transfer Agent (RTA) fee (0.25%); marketing expenses including commission paid to distributors (0.65%); Audit fees (0.10%); Costs of fund transfer from location to location (0.10%) and other expenses (0.10%).
Moneylife contributor R Balakrishnan says, "The ULIP changes are cosmetic in nature. Maybe the product becomes a little more efficient than it used to be, but in no way has it become comparable to a mutual fund. In a mutual fund, the total damage is limited by law to 2.50% per annum. In ULIPs, the selling commission has not been reduced. The only thing that has happened is that instead of front ending, it is now supposed to be spread evenly. In effect, a marginal improvement."
Some industry experts believe that ULIP charges will still be opaque and can differ from company to company. Insurance companies can still charge a lot of money to investors under the garb of administration and management expenses.
Mr Balakrishnan pointed out that in all investment products of the insurance industry, "There is a management charge, administration charge and some other charges. Typically, these aggregate over 3% per year, assuming a typical monthly investment of say Rs20,000 per month. These charges are separately deducted from the contribution paid by the customer."
He added, "ULIPs are the sole survival mechanism for the insurance industry. And they are perhaps the biggest prop for the stock markets. The government just does not want to rock the boat. Hence they have legitimised what they have been doing."
Insurers are gearing up for a number of changes in the way they sell ULIPs after the new norms passed by the insurance regulator
While the Insurance Regulatory and Development Authority's (IRDA) new norms for Unit-linked Insurance Plans (ULIPs) are good for consumers, private insurers are protesting that they could see the end of the product and they will sink into the red again or remain loss-making. They fear that agents would prefer to sell traditional plans since ULIPs would turn less attractive. Interestingly, some even fear that stricter rules may spell the death of ULIPs, which have been their biggest product in the past five years. Were this to happen, it would spell another important turning point in the insurance industry.
While most insurers contacted by Moneylife were guarded or positive in their public response to IRDA's new rules, some have refused to respond and claim they are still studying the implications. "On the face of it, the impact of these guidelines on customers is favourable, with lower charges, guaranteed returns, etc. In the medium to long run, these changes could seriously impact choice of investment options to customers, restrict product design & innovation, increase new business strain and call for increased capital requirements for insurers-thus impacting the profitability of insurers," said Deepak Sood, managing director and chief executive officer, Future Generali India Life Insurance Co Ltd.
Insurers believe that IRDA's new guidelines will affect their bottom lines. The say that capping of the charge structure will restrict the product portfolio and its flexibility. "Our bottom lines will be affected negatively and gradually even our top lines. With such norms, how does IRDA expect us to protect the policyholder's money?" asked an official from Bajaj Allianz Life Insurance.
"These changes are likely to have significant impact on product mix, distribution mix and cost structures of the industry. The timeline for implementation of these changes is very aggressive," said Rajesh Sud, chief executive officer and managing director, Max New York Life Insurance.
"In line with expectations, capping of charges will impact margins adversely. With limited product differentiation, having a low and variable cost business model will be critical. This, in turn, will lead to cost-cutting across the sector, impacting distributor commissions adversely," said an analyst from Edelweiss Securities Limited. According to Edelweiss, the capping of surrender charges is being considered a bigger blow than the cap imposed on the difference between gross and net yields, as it would not only restrict the ability to generate revenue, but also raise the persistency risk borne by the insurers.
"Secondly, the commission structure can't sustain an agent's income; (the) agency channel will suffer badly. I hope we don't land up in a situation where the product is very good but no one is willing to sell it," said Kamesh Goyal, Bajaj Allianz Life Insurance country manager and chief executive officer.
A Reliance Life Insurance official, who spoke to Moneylife on the condition of anonymity, said that the insurance companies would also now shift their focus to selling more traditional plans. In fact, during the turf war between SEBI and IRDA, where insurance companies were banned from coming up with new ULIP products, insurers started coming out with more traditional plans. He says that the plans would now look more traditional then ULIPs.
"We understand that IRDA is simultaneously coming out with treatment of discontinuance-linked insurance policies. Under these regulations, the insurer will not be able to recover the incurred expenses (particularly under large value policies) fully as the regulator has prescribed the limits of discontinuance charges not only by percentage of annualised premium, but also in absolute value," Mr Sood added.
Probably the thorniest issue for insurers is the stipulation that all pension products should guarantee a return of 4.5% to protect the lifetime savings from adverse fluctuation at the time of maturity. Insurers believe that this would not be possible for a long-term product and investments in ULIPs will now go to safer outlets like debt and securities where the yields are low.
"Because of the guarantee structure being introduced in pension plans, insurers will now play safe, as they can't invest in equities, which means the upside is lost as everything is invested in securities and debts," the official from Reliance said, adding that ULIPs will now become more of an endowment plan.
GN Agarwal, Future Generali's chief actuary feels that there will be a drastic impact on the industry. According to him, more than 50% of ULIPs will be withdrawn from insurance companies and nearly all pension plans linked with ULIPs will be withdrawn. He went on to add that insurance companies whose revenues were solely based on ULIPs would be severely affected. He added, "They (the new norms) are too restrictive and pension products will be hit a lot, it would almost be impossible for life insurers to guarantee 4.5% on a long-term insurance product."
Insurers in the past have maintained that insurance must be sold on a commission-based model and are marketed on mutual relations. Nearly 80% of ULIPs are sold in rural and semi-urban parts of India. Life India Council's secretary general SB Mathur has said in the past, "Most of these sales are relationship-based, where it is very awkward for an agent to charge his client for doing his work."
The new framework reduces agent commissions considerably as insurers would now have to ensure that they can charge their customers 4% of the annual premium paid. Agents selling ULIPs will be less motivated and they may shift to selling traditional plans like endowment plans, as commissions are higher. The commissions for selling traditional plans are still 30% to 35% in the first year; in the second and third years the commissions is 7.5%; from the fourth year onwards, the commission is 5% for a 15-year policy.
However, one must note that the move of capping charges by IRDA does comes as a surprise, especially when its chairman, J Hari Narayan, in the early weeks of June, came out in support of insurance agents and the commission given to them as he felt that it would bring about smooth functioning for the distribution of insurance, at an event in Mumbai. He had said, "With the kind of sustained activity, which an insurance agent has to undertake, the number of times he has to meet a prospect before a sale can be concluded and the kind of post-sales service that he has to provide for the insurance holder, a commission-based model is necessary. The remuneration (to agents) is not excessive; there cannot be a lower-cost method for distribution."
ULIPs are hybrid products that combine elements of investment and insurance, and have been a big investment magnet for insurance companies. According to the Life Insurance Council of India, an industry body representing 23 life insurers, of the Rs2,00,000 crore-plus life insurance premium collected in the first 11 months of 2009-10, more than Rs91,000 crore came from ULIPs.
The new guidelines have increased the lock-in period for ULIPs from three to five years mainly to ensure that they become a long-term insurance product rather than a short-term investment option. During this period, no residuary payments on lapsed, surrendered or discontinued policies will be made. Top-up on insurance premiums will now be treated as a single premium, meaning that every top-up that one makes will have to have an additional insurance cover backing it as well.
After hitting a monthly low last week, Concurrent shares are hitting upper circuits—now backed by dubious information and inspired recommendations in blogs. The regulators have still not reacted
Shares of Concurrent (India) Infrastructure Ltd hit the upper-circuit limit for the third day in a row on Tuesday, following some clarification by the company to the Bombay Stock Exchange (BSE). Just last week, Concurrent shares were falling before hitting a monthly low of Rs24.1 on the BSE. Meanwhile, investors are still wondering what the real details about the company are.Earlier, Moneylife had reported on how the company had apparently misled investors with a false announcement on a Sikkim power project (read more: http://www.moneylife.in/article/8/6290.html), and some investors had taken others for a ride in Concurrent shares (http://www.moneylife.in/article/8/6391.html). Thereafter, Concurrent's chairman and managing director Koneru Sudhir Babu met us at the Moneylife office on 23rd June to assert that everything was open and above board. We then sent the company some questions. The company has now replied but there are still gaps in its answers.
The company has reported a sudden boost in revenues, net profit as well as operating margins (OPM) and earnings per share (EPS) in its March quarter results (read more: http://www.moneylife.in/article/8/6438.html). But among the most important issues is a remarkable discrepancy in its quarterly and annual results. Concurrent had reported negligible (or zero!) depreciation in the last quarter which was quite astounding for any functioning company, not to speak of an infrastructure company which would have to have heavy investments. Mr Babu, in a written reply, told us that the prime reason for not having depreciation in significant numbers is that the company is at present outsourcing the works after detailed engineering, hence there is low depreciation. He said that the company has started to build its in-house equipment to execute projects from 1st April and equipment-related depreciation will get reflected in the first quarter of FY11. But any company would certainly have lots of depreciable assets-including computers, office equipment and automobiles.
Secondly, in a regulatory filing, Concurrent said on 10th May that it has been issued an assurance letter from Kranthi Constructions for a work order of Rs74.37 crore for the project 'Erosion Control for Managing Flash Flood for Guwahati city', accorded a top priority by the government of Assam. However, in a news report, Assam Tribune, a local daily, listed the total project cost as Rs26.25 crore, which is divided into two parts-Rs5 crore sub-project for Basistha-Bahini Watershed and Rs21.25 crore sub-project for RG Baruah Road-Bharalu Watershed. The first sub-project has secured sanction from the North Eastern Council (NEC) for funding in 2009-10 fiscal, the report said.
We asked Concurrent on how is there a big cost difference between its filing and the project cost. Concurrent said that Hyderabad-based Kranthi Constructions has received contracts from the authorities in which the first letter is for Rs21.25 crore and second is for Rs53.12 crore. "They (Kranthi Constructions) in turn assigned the work for processing and preparing of project proposal to Concurrent India with an assurance that with the completion of processing and preparing of project proposal, Concurrent will be given an order for the total aggregate of works equivalent to Rs74.37 crore for which Kranthi Constructions got two separate assurance letters."
In a telecon with Moneylife, the Concurrent CMD said, "The project cost is not Rs21.25 crore, it is Rs75 crore, which was given from Central government aid and because there would be a lot of approvals required for the total project they will not give a single letter and would split the work. If they come up with a single order then they will have to invite global tenders. The project has been split as per Central government norms under which the minister can sanction projects up to a certain level and the department has powers to sanction a project for a lower level." We have no way of independently verifying this.
There are other issues too. On 27 November 2009, Concurrent reported that it has signed a collaboration agreement with Eliss Richardson Inc and that the company will transfer technical knowhow for turnkey implementation of power plants to Concurrent. Moneylife searched the Internet for any reference about Eliss Richardson. All we could find out was related with Concurrent. And if one removes Concurrent from the search input, there is not a single result about Eliss Richardson on Google, Yahoo or Bling. Eliss Richardson just does not exist-at least on the Web!
When asked about Eliss Richardson, this is what Mr Babu said: "Eliss Richardson is (an) engineering, power-consulting company based in the US. This company has developed a new technology in thermal and solar energy. We are in (a) tie-up with them to have total Indian market in a joint venture. This is a new technology, which has not come yet and we need to get approvals from the concerned departments. Solar is going to be a major source of energy and with this technology we think we would be able to reduce its cost to Rs12 crore per MW from Rs18 crore per MW."
When asked why there is not a single mention of Eliss Richardson on the Internet, Mr Babu said, "This is not a big company. Basically it is a technocrat. I will send you their email ID in case you want to contact them. I can give you their numbers so that you can have (a) discussion with them."
What is interesting is a majority of contractors, partners or sub-contracts mentioned by Concurrent in all its regulatory filings either do not exist or are mentioned in tandem with Concurrent on the Web. Whether it is Ellis Richardson or Sreenidhi Construction or Brahmani Udyog, the story is the same. According to Mr Babu, Kranthi Constructions, which gave it two assurance letters for the Guwahati flash flood related work, is a special Class-1 contractor based in Hyderabad. But what we found on the Internet is that the same contractor is mentioned as a real-estate builder and developer.
Moneylife has always attempted to offer a balanced view to its readers and in order to protect investors has researched each and every fact before publishing. However, according to Mr Babu, by directly contacting the concerned authorities, Moneylife is trying to "create confusion" in their company affairs. "(We) request you to first deal with the company and we shall endeavour to give you whatever information you like," he said in the mail.
However, it was only when Sikkim Power Development Corp (SPDC) denied any deal or contract with the company, Concurrent came up with a clarification related to the Sikkim Power project. If someone had not checked with SPDC, then the company would not have come out with a clarification. Interestingly, during the period between its announcement and clarification, its shares were trading at its highest level. (read more: http://www.moneylife.in/article/8/6290.html).
On 9th February, Concurrent had said that it had procured an order from Indo Asian Projects Ltd for supply of beneficiated laterite on for unloading siding for Vedanta Aluminium Ltd, Orissa, and the total value of the contract was Rs11.8 crore. Indo Asian Projects is also a BSE listed company. However, when we checked, we did not find any regulatory filing by Indo Asian Projects about ordering supply of laterite from anyone. Interestingly, Indo Asian Projects has reported total revenues of Rs2.12 crore for FY10 and it has supposedly given an order (or sub-contract) of Rs11.8 crore to Concurrent!
Mr Babu, in his email said, "Concurrent is currently implementing the order by buying its own trucks and hiring trucks from others and lifting laterite from the east coast and transporting the same to the railway siding and also to manufacturing sites. Since the order has been assigned by Indo Asian they might not be reflecting (the same) in their financials, however, we are nobody to comment on their financials."
He sent us some images that show some trucks labelled as 'Concurrent', but one cannot make out when and where the photos were clicked. He told us that these trucks are being used to transport laterite from Rajahmundry to Vedanta Aluminium's Jharsuguda plant in Orissa.
As mentioned in our previous article, we have asked for the annual report and balance sheet of Concurrent from Mr Babu. We are still waiting for it. However, the mail sent to us by the company said: "This is the maiden year after Mr Sudhir Babu has taken over the company management. The first audited balance sheet will be released 21 days before the AGM, which is scheduled in August 2010 and the unaudited financials in terms of required public disclosures have been given to BSE, which you may refer."
Meanwhile, the bunch of investors led by Arun Mukherjee continues to plug the stock in various places including a dubious website (http://www.arunthestocksguru.com/2010/06/concurrent-india-infrastructure-ltd_24.html). In his latest blog, Mr Mukherjee talks about a Rs-1,300 crore contract win of Concurrent in Sri Lanka. It is old news, reported by the company in November 2009, where no financial details were given. However, it is surprising that the blogger came out with the project cost and other details as well as the size of Concurrent's total order book (whether true or false, we don't know) and financial estimates of other projects.